The Five Most Terrifying Things about the Sequester

The latest fiscal showdown concerns the “sequester”—across the board cuts to (almost entirely) discretionary spending that will total just over $1 trillion in the next decade, and which are set to take effect on March 1. What should those who have better things to do with their life than follow fiscal policy debates know about the sequester?

1. The sequester will hurt job-growth

As we pointed out during the debates raging in the run-up to the “fiscal cliff," the sequester was the second-most damaging component of the austerity bundle set to take effect on January 1, 2013. The worst component was the non-renewal of the payroll tax cut, which is already dragging substantially on the economy. All told, if the sequester kicks in the economy will likely end the year with roughly 500-600,000 fewer jobs than if it were repealed. These are jobs the economy desperately needs. To be clear, the sequester alone won’t drive the U.S. economy back into outright recession, but it surely will make the agonizingly slow recovery that much slower. Further, it’s worth noting that even a full repeal of it with no offset will still result in an economy growing much too slowly to quickly return to full-employment. In a nutshell, arguments over the sequester are roughly about whether we’d like to be $900 billion or a full $1 trillion below economic potential in the coming year.

2. It’s not just unnecessary, but perverse

The sequester is the perfect illustration of how D.C. policymakers and pundits think that all economic policymaking can be reduced to shrinking the budget deficit, always and everywhere. However, the nation’s budget balance should be seen as a tool, not an invariant target. When the economy is healthy, rising budget deficits could indeed push up interest rates and “crowd-out” private investments. But when the economy is unhealthy and starved for demand, then budget deficits can (and should) be increased to finance job-creating transfers (unemployment insurance and food stamps) and public investments, with the resulting spur to growth actually “crowding-in” private capital.

Further, in today’s economy deep spending cuts won’t just harm the economy (though this alone should rule them out), it will depress activity so much that the resulting fall in tax revenue and increased safety net spending will actually make the nation’s debt ratio worse. One doesn’t need to look hard to see this destructive dynamic in play—the United Kingdom’s clearly disastrous austerity programs has seen not just an increase in unemployment, but also a steady increase in the nation’s debt ratio.

3. Paying for it with other spending cuts is absurd.

Far too many in the Beltway have argued that it is the form of the sequester’s spending cuts—across-the-board and indiscriminate—that constitutes the real problem. From the perspective of job-creation this isn’t right. A cut is a cut. So, in terms of supporting economic activity and jobs in the next year, “paying for” a repeal of the sequester in the form of allegedly more-rational cuts of a similar size will do nothing but cause the same pain the sequester promises.

4. The sequester is worthless even as a commitment device.

Nothing in the law prevents Congress from simply de-activating the sequester with nothing to pay for its impact on deficits. Further, nothing in law prevents Congress six, seven or eight years in the future from scrapping it. In short, it is a completely voluntary commitment device. And this, of course, is its only virtue; if something that will cause predictable economic damage can be deactivated with ease, why shouldn’t it be? The only thing keeping this rational move from being undertaken is, of course, the policymaking elite’s irrational fear of budget deficits.

5. Entitlement are commitment devices. That’s scary.

Given that much of the negotiation over the sequester is how to “pay for” its repeal with other spending cuts, it should be noted that legislated changes to Social Security, Medicare, Medicaid and the ACA do not need annual appropriations, and hence are likely to be much longer-lasting than any agreed-to discretionary cuts. Replacing the sequester with cuts to these valued programs would be a disaster. We have shown, for example, that Social Security, Medicare and Medicaid combined contributed ten times as much to income growth for middle-income households over the last generation than growth in hourly wages. These programs are, by far, the part of the U.S. economy that still manages to deliver some goods to low- and moderate-income households. Gutting them in the name of securing a better economic future is perverse indeed. Obviously, pure efficiencies that save these programs money—tougher drug bargaining for Medicare, or reforms to provider reimbursement that squeeze out economic rents and improve quality—are welcome. But simple cuts to these programs that shift costs onto households as a way to pay for the sequester is close to a worst-case outcome.

Given all of this, the optimal way forward is clear: repeal the sequester, full stop. It’s clear that the Obama administration is eager to avoid a drag on economic recovery in the coming year. It’s also clear they feel a recurring need to prove their deficit hawk bona fides, even to the extent of pledging to meet aggressive ten-year deficit reduction targets. These goals are bad policy, increasing pressure for spending cuts that will be damaging to near-term recovery, and potentially damaging to long-run income growth for low- and moderate-income families. There shouldn’t be any need to caveat a desire for faster job-growth in the near-term.

She may no longer be the chair, but she’s still a member—and could be a force for good.

About the Author

Josh Bivens researches macroeconomics, globalization and social insurance for the Economic Policy Institute. He is the author of Everybody Wins Except for Most of Us: What Economics Teaches About Globalization.